Negative Effects of a Command Economy

A command economy is one in which a government makes all or most of the economic decisions of the marketplace and owns all or most property, especially all large commercial and industrial property. Generally, Communist, Socialist and Fascist countries are run as command economies. Such economic systems are prone to a number of negative effects that have been demonstrated by countries such as the former Soviet Union and North Korea.

Misallocation of Resources

Command economies are highly susceptible to massive resource waste, in terms of both human and capital resources. The main reason for this is that because all decision-making is made by a central authority, the information necessary to correctly guess where materials, labor, natural resources and expertise should go very quickly becomes overwhelming. It is impossible for the central planners to know all the varied needs that dictate what to allocate where in an entire country.

Extreme Inefficiency

Massive inefficiency is a direct result of the information overflow that comes from deciding where to allocate resources for an entire country. This is because the central government, having the only legal authority to make economic decisions, simply can't make them all fast enough to allow functional markets, easy availability of goods and services and the kind of flexible economic living found in market economies to exist. The result is that almost any kind of consumer or social demand is met very slowly and inefficiently.

Promoted by

Famine and Shortages

The inefficiency and misallocation of resources in a command result in government planners not knowing on time how much to produce of one product or another, and when or where. This creates a society in which shortages of even basic things like food and personal products become a constant problem. In severe cases, these shortages can lead to famines that kill hundreds of thousands or even millions of people.

Loss of Individual Freedom

It is easy to imagine that a command economy would allow for very little personal or economic freedom. This historically has been the case with such economies. Most people have individual freedom from an economic liberty to pursue their personal interests, business ventures and career interests. An economy in which the government decides all activity naturally restricts such choices. A central government that commands an economy also commands the economic lives of its citizens by default.